Spain back in recession amid banking system worries

Thousands demonstrate against education and health care spending cuts in Madrid, Sunday. Tens of thousands of people across Spain are protesting education and health care spending cuts as the country slides into its second recession in three years. (Daniel Ochoa de Olza/AP Photo)

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Spain confirmed Monday it was officially back in recession as the country's economy shrank 0.3 per cent in the first quarter compared to the previous three months.

This is Spain's second recession in three years. The contraction follows a similar decline in the final quarter of last year. Two consecutive quarters of economic contraction constitute a technical recession.

The National Statistics Institute said that compared to the first quarter of 2011, the economy shrank 0.4 per cent. The Bank of Spain last week said the economy had shrunk 0.4 per cent on the quarter. The statistics institute's findings are taken as the official figures.

Spain is struggling after the collapse in 2008 of a property bubble that had fueled nearly a decade of solid growth. It now has 24.4 per cent unemployment and a deficit of 8.5 per cent as of the end of 2011, which it must reduce to 3 per cent in 2013.

Monday's release came days after Spain had its debt rating downgraded by Standard & Poor's by two notches from A to BBB+, citing a worsening budget deficit, worries over the banking system, and poor economic prospects.

Defaulted mortgages

The credit rating agency followed this up Monday by lowering long- and short-term ratings on 11 of Spain's top banks, including Banco Santander SA, the eurozone's largest bank by market capitalization.

Spanish banks are discussing creating a private entity that would assume their so-called toxic assets — defaulted mortgages and other non-performing loans stemming from the collapsed real estate sector — an official at the Economy Ministry said Monday. The creation of such an organization is designed to take the burden of trying to sell foreclosed properties off the banks and allow them to concentrate on providing credit to the private sector.

The official added that banks would only be able to transfer toxic assets if they had already set aside provisions under existing government rules. The government would not inject any taxpayer money into the creation of such an entity and its role would be limited to setting up rules for how it would work. The official spoke on condition of anonymity in line with ministry rules.

Sunday saw tens of thousands people march throughout Spain to protest the conservative's government batch of emergency reforms and austerity measures.

But speaking the same day, Prime Minister Mariano Rajoy said the government would continue to make reforms week by week, claiming the gravity of the situation required this.